1. Field of the Invention
The subject invention is directed to a system and method for determining the buying power of an investment portfolio, and more particularly, to a system and method of determining a purchasing limit for a proposed transaction involving a financial instrument.
2. Background of the Related Art
Investment managers, and in particular, those who are responsible for managing the portfolios of large institutional investors, buy and sell fixed income securities and equities, based upon the investment objectives set forth by the investors. For example, a particular institutional investor may wish to restrict certain types of assets from its portfolio. In such an instance, the investor may instruct its portfolio manager not to purchase corporate bonds or equities from certain corporations or industry sectors. Alternatively, a particular institutional investor may have the desire to limit a certain percentage of its assets under management to certain types of fixed income securities. For example, an institutional investor may designate that not more than five percent of its assets under management should be invested in agency-backed securities.
Investment objectives are generally conveyed from an investor to a portfolio manager in the form of a set of investment rules or guidelines. The investment rules are then used by the portfolio manager to develop compliance rules against which investment decisions or portfolios of investments are analyzed.
Compliance rules operate in two distinct ways. First, a compliance rule can affect a particular investment decision, such as the decision to purchase a large quantity of Treasury notes for inclusion in a particular portfolio. This decision could be governed by one or more compliance rules that would influence the decision before the investment is made. Such a rule is commonly referred to as a “front end” compliance rule. Alternatively, a compliance rule could affect the composition of a particular portfolio, such as by requiring a portfolio manger to sell a quantity of a particular type of fixed income security. For example, as a result of a change in interest rates, a compliance rule may be employed to instruct a portfolio manager to reduce the quantity of a certain class of Treasury notes within a particular portfolio. Such a compliance rule would affect the portfolio as a whole, rather than a particular investment decision, and is therefore commonly referred to as a “back end” compliance rule.
Compliance rules, whether related to front-end or back-end compliance, have been used by portfolio managers in computerized portfolio management systems. In the past, compliance rules set forth by institutional investors have been translated into computer readable statements. Such statements are then used to instruct a computer system to monitor investment decisions and the composition of portfolios as a whole, and to inform portfolio mangers whether particular investment decisions or portfolios of investments are in compliance with the investment objectives of particular investors. In this case, compliance rules are used to provide portfolio managers with information concerning purchasing limits for proposed transactions.
More particularly, prior to executing a trade involving a financial instrument, a portfolio manager will typically be interested in knowing the purchasing limit or buying power for a particular portfolio, or for a group of portfolios. That is, the portfolio manager would like to know how much of a particular financial instrument can be purchased for a given investment portfolio, without violating any compliance rules or limits, before the trade is executed. Without this information, a portfolio manager could enter a transaction request for a quantity of securities that may be in excess of a certain limit placed on the portfolio by the compliance guidelines. In such an instance, the portfolio manager would have to modify the transaction request so that it is acceptable. Without guidance from the system, this could take several attempts, making the task extremely inefficient. It would be beneficial therefore to provide a portfolio manager with transaction limit information, based upon compliance rules, prior to the execution of a trade to enable the manager to efficiently allocate available funds among one or more portfolios.